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Buy Big Bank Stocks and Give Regionals a 'Breather': Merrill Lynch (Update 2)

U.S. Bancorp

U.S. Bancorp of Minneapolis has seen its shares return 31% year-to-date, through Tuesday's close at $34.68. During 2011, the shares returned 2%, which was a strong showing, during a year in which the KBW Bank Index declined 25%.

The shares trade for 2.9 times tangible book value, and for 11.4 times the consensus 2013 EPS estimate of $3.05. The consensus 2012 EPS estimate is $2.85.

With a quarterly payout of 20 cents, the shares have a dividend yield of 2.31%.

The company has earned Penala's label as "best in class," with an ROA of 1.59% for the 12-month period ended June 30, and an ROE of 22.01%, which was the strongest among the 24 components of the KBW Bank Index.

U.S. Bancorp will report its third-quarter results on Oct. 17, with a consensus EPS estimate of 73 cents, increasing from 71 cents in the second quarter, and 64 cents during the third quarter of 2011.

Penala downgraded U.S. Bancorp to a neutral rating from a "Buy" rating, while lowering her price target for the shares to $35 from $37, "as we believe that USB's above average valuations will come under pressure based on a declining [return on tangible equity] that we forecast."

The analyst said that the stock is "trading close to their all-time high with USB at 2.4x YE13 [estimated tangible book value], in line with our target TBV multiple and at 11.1x our 2013E EPS versus our target 11.5x P/E multiple, leaving limited upside potential in the absence of a significant upward revision to our EPS estimate.

Bank of America Merrill Lynch estimates that U.S. Bancorp will earn $3.10 a share during 2013.

Of course, Penala's rating and price target reflect expectations for the stock over the next year. For truly long-term investors, the company's quality speaks for itself. Penala said "we continue to view USB as a high-quality franchise given the demonstrated market share gains (loan growth has consistently beaten expectations), an established culture of expense control, better diversity from spread income, and the strongest [return on tangible equity] outlook in our universe.

USB ChartUSB data by YCharts

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

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